AP Macroeconomics
CH (23,24) 25 and 26 TEST REVIEW
Mr. Kelley
NAME_________
KEY
_______________________________________
PART I: Multiple Choice
1. GDP is equal to the _____________ value of all final goods and services produced within a county in a given period of time.
A. production
B. market
C. wholesale
D. retail
E. typical
2. Which of the following will most likely occur as a result of an increase in labor productivity in an economy?
A. An increase in output and a decrease in inflation
B. An increase in interest rates and a decrease in investment
C. A decrease in both money demand and money supply
D. A decrease in exports and an increase in unemployment
E. A leftward shift in the short-run aggregate supply curve and a decrease in output
3. Economic growth is best defined as
A. A reduction in the infant mortality rate
B. A decrease in the unemployment rate
C. An increase in the labor force participation rate
D. A short run increase in GDP without inflation
E. A sustained increase in RGDP per capita

AP Macroeconomics
CH (23,24) 25 and 26 TEST REVIEW
Mr. Kelley
4. Which of the following individuals in classified as unemployed?
A. A 15 year-old student who is looking for a babysitting job
B. A laid-off computer programmer who has given up looking for a new job
C. A parent who works in an after-school day care center for 15 hr/wk
D. A recent college graduate who is looking for her first job
E. A mayor who lost an election and retired
5. Which of the following would most likely stimulate economic growth?
A. Decreased savings
B. Decreased wages
C. Increased transfer payments
D. Increases personal income taxes
E. Technological progress
6. If the NGDP of a nation increased in 2007 relative to the previous year, it must be true that
A. Both the price level and the RGDP increased
B. Neither the price level nor the RGDP increased
C. The price level increased by a larger percentage than did the RGDP
D. The price level increased by a smaller percentage than did the
RGDP
E. The price level and/or the RGDP has increased
7. GDP has been criticized as a measure of well-being because it fails to take into account which of the following?
A. The distribution of income
B. The value of services
C. The value of intermediate goods
D. The value of financial transactions and the sales of used items
E. The value of government services

AP Macroeconomics
CH (23,24) 25 and 26 TEST REVIEW
Mr. Kelley
8. The annual inflation rate is expected to be 5% over the next three years.
Juan plans to take out a 3-yr loan to purchase an automobile. If Juan decides not to take out the loan if the real interest rate exceeds 3%, the highest nominal interest rate he is willing to pay is
A. 2%
B. 3%
C. 8%
D. 15%
E. 25%
9. Which of the following is NOT a major cost of inflation?
A. Resources will be misallocated
B. Wealth will be redistributed
C. Savings will be discouraged
D. Real incomes will fall
E. Financial wealth will be eroded
10. Sadaf loses her job at a shoe factory when the economy falls into a recession. She is considered
A. Frictionally unemployed
B. Cyclically unemployed
C. Seasonally unemployed
D. Structurally unemployed
E.
A Discouraged worker
11. Which of the following will promote economic growth?
A. Higher wages
B. Lower prices
C. Increased Government spending
D. Technological advances
E. An equal percent increase in Labor Input and Labor Productivity

AP Macroeconomics
CH (23,24) 25 and 26 TEST REVIEW
Mr. Kelley
12. Output in Company X is 30,000 units with 3,000 hours worked. In
Company Z output is 40,000 units with 8,000 hours worked.
A. Company Z’s labor productivity is 33% higher than in Company X
B. Company Z’s labor productivity is 25% higher than in Company X
C. Company X’s labor productivity is 33% higher than in Company Z
D. Company X’s labor productivity is 25% higher than in Company Z
E. Company X’s labor productivity is double that of Company Z
13. A bank charges a Nominal Interest Rate of 7.5% for a two-year loan. The
Real Interest Rate the bank advertises in 4%. What does the bank expect inflation to be for the two year time span?
A. -3.5%
B. 11.5%
C. 7.5%
D. 4%
E. 3.5%
14.
Suppose real GDP per capita in Canada is $25,000 and its annual growth rate is 7%. Real GDP per capita for Canada will double in:
A. 5 years
B. 7 years
C. 10 years
D. 20 years
E. Can not be determined with the information given.
15.
An increase in savings in the United States would:
A. Decrease the rate of economic growth as consumer spending decreases
B. Increase economic growth as capital investment increases
C. Decrease the rate of economic growth as resources go unused
D. Increase economic growth as capital investment decreases
E. Decrease economic growth due to the decrease in GDP

AP Macroeconomics
CH (23,24) 25 and 26 TEST REVIEW
Mr. Kelley
16. Sources of economic growth would include an increase in all of the following except :
A. Consumer spending
B. Government spending
C. Financial investment
D. Consumer saving
E. Investment spending
17.
In the long-run, a decrease in investment spending would mean:
A. Real capital will decrease causing economic growth to decrease
B. Real capital will decrease causing economic growth to increase
C. Financial capital will decrease causing economic growth to decrease
D. Financial capital will increase causing economic growth to increase
E. Human capital will increase causing economic growth to increase
18.
Economic growth would be reflected by a:
A. A leftward shift of the PPC.
B. A rightward shift of the PPC.

AP Macroeconomics
CH (23,24) 25 and 26 TEST REVIEW
Mr. Kelley
Part II Short Answer:
1 1.
Economists note there is a slowdown in labor productivity in the manufacturing sector.
P
PROVIDE two possible reasons for the slowdown in labor productivity and how each affects labor productivity
CHOICES include Decrease (or non-advance) in Technological
Advances, Decrease in Quantity of Capital, Lack of Education and
Training
2.
Congress votes to halt all oil drilling in the Gulf of Mexico.
Would this cause a change in the Supply Factor, Demand Factor, or
Efficiency Factor of Economic Growth.
What change would occur? Decrease in the supply of natural resources leading to a slowdown in production, leading to a decrease in growth

AP Macroeconomics
CH (23,24) 25 and 26 TEST REVIEW
Mr. Kelley
PART III: FRQ
1. The chart below shows U.S. RGDP and Population for selected years.
YEAR RGDP in
Billions
Population in
Millions
1950
1970
1990
2009
$2,006
$4,270
$8,034
$12,987
152
205
250
307
Calculate the PERCENT change in RGDP/Cap for each of the following:
(a) 1950 to 1970 (b) 1950 to 2009
1950: 2006000000000/152000000 = $13,197.37 1950: =$13, 197
1970: = $20,829.27 2009: = $42,303.93
20829.27/13197.37 = 1.58
58% increase
=3.206
220% increase!
2. When unemployment is above the natural rate it means that society is operating at some point inside its PPF.
(a) Imagine you need to ‘decipher’ that sentence to a high school senior who has not taken AP Macroeconomics. Please do so below. Include the terms Actual GDP, Potential GDP, and GDP Gap.
Potential GDP is the output of an economy at full employment, which is actually at the natural unemployment rate, usually around 5%.
Natural unemployment occurs at all times, and is not considered a problem. Actual GDP is calculated by one of several methods too detailed to go into now, but any unemployment greater than the natural rate will reduce Actual GDP. The GDP Gap is the difference

AP Macroeconomics
CH (23,24) 25 and 26 TEST REVIEW
Mr. Kelley between the Actual and Potential GDP. A PPF is a graph which shows the potential output of an economy operating at full capacity (at the rate of natural unemployment), aka GDP. A point not on the curve but less than the curve (which falls ‘inside’ the curve) indicates an economy whose output is not maximized. So the distance between the point and the PPF describes the gap between potential and actual output, just as the GDP gap does.
3. Assume that over the next year, LaLa Land has an inflation rate of 6%, a natural unemployment rate of 5%, a nominal interest rate of 8%, and an actual unemployment rate of 3.5%
(a) Using a correctly labeled PPF, show the economic growth of LaLa land over the next year.

AP Macroeconomics
CH (23,24) 25 and 26 TEST REVIEW
Mr. Kelley
(b) Calculate the real interest rate over the next year. SHOW your work!
N = R + I p
8% = R + 6%
2% = R
4. Inflation exerts significant costs on the economy. Explain how inflation:
(a) causes a misallocation of resources
See page 541, bottom of first column from ‘Demand-Pull Inflation and
Real Output’ and second column through “Hyperinflation”
(b) discourages saving
See page 539, first column, ‘Savers’
(c) redistributes wealth from lenders to borrowers
See page 539, first column, ‘Creditors’